The biggest tax haven in Europe is not what you might expect
By Matthew Lynn

Bloomberg News
September 13, 2007

LONDON: What is the biggest tax haven in Europe? Monaco, perhaps? Andorra or Liechtenstein? No, it's Britain.
Under an obscure piece of British tax legislation, anyone who lives in Britain but was not born there, can choose "non-domiciled" tax status. That means billionaires like Lakshmi Mittal, born in India, or Hans Rausing, born in Sweden, need pay tax only on the small amount of money they bring into the country every year, and not on their worldwide earnings.
In effect, that has made London a tax haven for everyone from Russian oil tycoons to international investment bankers.
Now that law is under increasing attack and presenting a tricky political problem for Prime Minister Gordon Brown. The trade unions are gunning for the loophole. So are politicians from the Labour Party and, more surprisingly, columnists for conservative newspapers.
They have a point. It does not make much sense for a highly taxed country - the top income-tax rate is 40 percent - to exempt a small group of wealthy people. It does not seem fair to the native population.
The trouble is, it is too late to change it. London and, by extension, the rest of the British economy have become dependent on the megarich. It would make as much sense for Saudi Arabia to shut down its oil industry or for Seattle to attack the software business as it would for Britain to abolish the "non-dom" rule.
There is no denying the impact the rule has had, or the growing debate about its consequences. According to figures compiled by the British Treasury, there were about 112,000 people claiming non-domiciled status in the year through April 2005. Although they reported a total of £9.8 billion, or $19.9 billion, in earnings, their wealth from overseas income would be much more.
That is a lot of people with a lot of money. Monaco has a population of about 32,000, Andorra has 70,000 people, and Liechtenstein about 34,000. So it is no exaggeration to describe Britain as the biggest tax haven in Europe.
Some people are not happy about that. In a report last week, the Trades Union Congress, which represents seven million workers in 66 unions, argued that closing the loophole could help raise the £4 billion the government needs to meet its pledge of halving child poverty by 2010.
The Liberal Democrats, the third-biggest political party, have called for stiffer rules for "non-dom" residents. So have Labour politicians.
"The reputation of Britain as a tax haven and the concern being expressed by tax authorities in the United States is something that must be addressed," Jim Cousins, a Labour member of Parliament, told the House of Commons in July.
Even on the right of the political spectrum, there have been rumblings of disquiet. Readers of Charles Moore in The Daily Telegraph or Rachel Johnson in The Sunday Times would have seen attacks on the unfairness of the "non-dom" rule in recent months. When even The Times and The Daily Telegraph, two conservative, free-market newspapers, say people are paying too little tax, something is up.
"I am not convinced that the financial services industry is dependent on tax breaks for a handful of individuals," Adam Lent, head of economic and social affairs for the Trades Union Congress, said in an interview. "After all, many of them are City workers, and both they and the businesses they work for have deep roots in the U.K. Where else are they going to go?"
In a world where people and capital are increasingly mobile, and where multimillionaires are being minted by the second, the attraction of "non-dom" status in Britain will only grow.
Other tax havens are wacky, obscure little places: Monaco is the only one that is really livable, and even that is pretty sleepy. But London is one of the most exciting, vibrant cities in the world. It is a great place to do business. Why pay punishing taxes in Paris, Munich or Stockholm when you could be paying virtually nothing in London?
The City, as London's financial district is known, has come to rely on the status of Britain as a tax haven. That is one of the reasons it is so successful. If you get rid of the rule now, business might start to drift away to Zurich.
There is certainly a good case to be made for lowering taxes for the native British. If Britain had a flat tax of, say, 15 percent, there would be fewer complaints about how little the super-rich were paying.

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